NSW Sydney prices still falling...

Discussion in 'Where to Buy' started by Oliver Shane, 4th Jun, 2019.

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  1. sash

    sash Well-Known Member

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    Well.....from where I sit..I got backlash when in 2016 I said Sydney would come off....in 2018-2020. It did it went down 15% on the median.

    Now I am getting backlash to say the recent positive movement might not eventuate into major increases. Despite the broker community and some people saying that you can borrow more...the rates for investors is still high comparatively. And the assessment of loans is going to get even harder despite the recent win in Federal court by Westpac on serviceability.
     
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  2. euro73

    euro73 Well-Known Member Business Member

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    One of the few things you and I agree on- kind of . I dont think things will get particularly harder. I can see there is some improvement to borrowing capacity. I just think talk of a return to boom lending conditions are overblown. I said from the first moment APRA announced the 2.5% floating rate that it would benefit O/Occ P&I borrowers a reasonable amount, but wouldn't provide the same improvement in borrowing power for those carrying IO debt, and especially investors carrying multiple IO loans ... and that we would certainly see a sugar hit from it , but it was difficult to see how it would/could trigger boom like conditions again, as has been suggested.... and that remains my view.

    I have run countless borrowing capacity reviews in the last few weeks to stress test dozens of my clients portfolios . I've run hypotheticals where I dropped them to 3% P&I over 30 years so I could access the lowest floor rates, and therefore the best possible /maximum possible results - and while there are improved results for sure, they just aren't enough to get most of them back into the market for additional purchases. Sure, they can get 80,90,100, maybe even 150 or 200K extra ....but that's not enough to buy another property .

    If the requirement to assess debt on P&I remaining term had been removed, we would be cooking with gas because investors could pile back in... but that has not happened, so the fundamental ingredients required to significantly improve borrowing capacity ie big wage growth or paying down debt - havent changed . With wage growth nowhere to be seen, the best way to beat the servicing ceilings remains debt reduction.

    The Westpac v ASIC case was likely the first of several to come. It feels like ASIC is just probing / testing out the boundaries of legislation, and will come at lenders several times more... I guess we shall see.
     
    Last edited: 21st Aug, 2019
  3. Illusivedreams

    Illusivedreams Well-Known Member

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    Can I ask if ASIC looses more cases will it not undermine it authority but also its desire to go after the banks.

    I actually completely agree with Westpac vs ASIC case finding.
     
  4. euro73

    euro73 Well-Known Member Business Member

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    I can’t remember where I read it, but ASIC said last week that they expected to lose - that they were testing boundaries . ASIC are being given lots more power and $$$ after the Royal Commission , so I have to assume there will be more to come
     
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  5. highlighter

    highlighter Well-Known Member

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    It's taking over 50 upcoming cases against the banks to the courts, most of them Royal Commission and lending related. The HEM case was not particularly well argued (ASIC didn't even do a decent job of setting out what it wanted so it's not surprising it lost). They're appealing too and they've said they were testing the limits of the legislation, which is not unusual. If they appeal it's got a very good shot at being overturned, it happens frequently.
     
  6. euro73

    euro73 Well-Known Member Business Member

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    There you go. 50 more cases planned. The reality is though, even if the decision stands and the banks all default to HEMS and abandon any further living expenses scrutiny, it might mean a few bucks in extra capacity for some ( who have occasional extra spending/one off's that were previously being counted against them and "may" now be ignored ) , a lot of extra bucks for others ( who have lots of discretionary/non essential spending that was previously being counted against them and "may" now be ignored ), or none of the above ( for those living an already frugal lifestyle where HEMS already covers them ) .... of itself it’s probably not really needle moving either way

    Everyone searching for signs that serviceability is "back" needs to understand that the real game changer wasn't really the HEMS, or even then 7.25% assessment rate. Yes those things definitely piled on the misery and hurt people compared to the old Henderson Poverty Index and "actuals" , but what really killed off investors borrowing power were the words " P&I and remaining term". The higher assessment rate of 7.25%, of itself, wasn't the issue. The higher rate of 7.25% P&I over remaining term was . Those with 5 years IO were being assessed at 7.25% P&I over 25 remaining years. Those with 10 years IO were being assessed at 7.25% P&I over 20 remaining years . It turned 7.25% into an effective rate @ 10% or higher . How? We all know that repayments after 5 years or of IO jump by over 40%, when compared to IO right? or that repayments jump by @ 60% when compared to IO, right? But if you take P&I from Day 1, rather than waiting until year 6 or Year 11, the repayment differential is only @28.5% when compared to IO

    Here's a crude analysis to show how things work
    7.25% P&I over 30 years is like 9.3% compared to 7.25% IO "actuals"
    7.25% P&I over 25 remaining years is like 10.15% compared to 7.25% IO "actuals"
    7.25% P&I over 30 remaining years is like 11.6% compared to 7.25% IO "actuals"

    You can see quite clearly from this crude set of calculations how "P&I remaining term" contributed to the significant reduction in borrowing capacity much more than the 7.25% assessment rate did. And because the overwhelming majority of investors are taught to use IO as a strategy, they were ensuring that their borrowing capacity was being penalised to a greater degree than those who chose P&I from Day 1. Of course, to choose P&I from Day 1 you need adequate yields/cash flow... something most vanilla yielding properties cant hope to provide. It's why I have been sayiong for years that higher yielding properties and debt reduction were so important ...

    Anyway...I digress......

    So by reducing the 7.25% assessment rate to a 2.5% floating rate that allows some investors to be assessed at 6% or 6.5%, sure... there's an improvement, - no doubt about it - but it's still 6% or 6.5% P&I and remaining term . So its still hurting IO borrowers by deeming them to be repaying the debt over 25 or 20 years .

    Here's another crude example using lower assessment rates top demonstrate the point ;

    6% P&I over 30 years is like 7.71% IO actuals
    6% P&I over 25 remaining years is like 8.40% IO actuals
    6% P&I over 20 remaining years is like 9.6% IO actuals - and this is why I said the ANZ10 year IO reintroduction would hurt, when it was announced earlier in the year

    6.5% P&I over 30 years is like 8.35% IO actuals
    6.5% over 25 remaining years is like 9.10% IO actuals
    6.5% over 30 remaining years is like 10.4% IO actuals

    These figures are crude, as there are obviously other inputs that go into servicing calcs. Neg gearing, addbacks, living expenses etc- but it demonstrates (crudely at least) why all this talk of lower floor rates and floating 2.5% rates was never going to be a magic bullet for investors - especially those carrying lots of 5 or 10 year IO debt. The effective, or deemed assessment rate - remains quite high even after the lower assessment rate is factored in. Lower than before, yes. No doubt about that. But still quite a long way away from where "actuals" put them in 2015 . APRA would need to get rid of P&I remaining term ( as well as ASIC abandoning HEMS) if you really want credit to be "back" to those pre APRA sorts of levels ... and I don't see any discussion of that happening

    Having said that - there's no denying things are better than they were . It's plain to see that things have improved a bit . Another cut of 50 bpts , if it was passed on , would improve things even further ....but still nowhere near pre APRA levels I'm afraid.

    This is why cash flow and debt reduction remain king for not only BUYING a portfolio, but HOLDING it and then GROWING it

    #cashcowsrule

    #theoriginaldebtreductiongladiator
     
    Last edited: 21st Aug, 2019
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  7. Tonibell

    Tonibell Well-Known Member

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    Are you referring to your calls back in 2014/15 - happy to be a naysayer then.
    Fine with not being ahead of the herd in heading for the exits back then.

    These days I've got more investment exposure to each of the share market and Brisbane than Sydney property in any case (excludes PPOR).

    Sash from 14 March 2015
    as per my previous posts..I am now formally calling that the Sydney market has topped out. Anyone who is getting in from this point onwards is probably not going to see much growth.


    Sydney Market at top - calling a severe correction in 2018-2019
     
  8. Oliver Shane

    Oliver Shane Well-Known Member

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    Yep he was 8-12 months early, gees you should just be thanking the bloke
     
  9. Tonibell

    Tonibell Well-Known Member

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    The peak was July 2017 - so more like 28+ months early for this call (there was earlier ones).

    Prices are still well (10%+) above March 2015 levels even now - so I don't think there has been much redemption.

    I'm OK with being a naysayer from 2015 - my last Sydney property purchase was 2013 and I sold Sydney property in 2017 and 2018 so maybe I've switched camps.

    Anyway - last crumb you get from me.
     
  10. sash

    sash Well-Known Member

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    Did a severe correction not happen in 2018/2019? It ain't over yet ....as you said the sharemarket and the economy is the issue....
     
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  11. Tonibell

    Tonibell Well-Known Member

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    No.
     
  12. Oliver Shane

    Oliver Shane Well-Known Member

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    Still happening
     
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  13. Oliver Shane

    Oliver Shane Well-Known Member

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    Still waiting for your apology for repeatedly implying all the sensible forecasters are one and the same user :)
     
  14. Tonibell

    Tonibell Well-Known Member

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    I did give that apology the other day - perhaps you were not tagged on it.

    Was prepared to accept the definitive statement that Simon made.

    So ... sorry about that.
     
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  15. Tonibell

    Tonibell Well-Known Member

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  16. marmot

    marmot Well-Known Member

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    One of the biggest losers of mega low interest rates will be the very institutions where we store all our wealth and allows us to borrow money to buy property.
    As they found out in the mid 1920s in the U.S.
    when businesses became more interested in making lots of profit than paying workers more , eventually households stopped spending money and the stock market became overvalued.
    Once it became obvious of the losses on the stockmarket , everything collapsed,and so did many of the banks.
    The biggest risk now is an idiot in charge of the U.S , no ability to further stimulate economies through big decreases in interest rates , and the realization that QE did not work.
    10 years on from the GFC and were still running around trying to drop interest rates to stimulate our economy.
     
  17. Woodjda

    Woodjda Well-Known Member

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    That's a pretty terrible return over more than 4 years. That also doesn't include the buying costs, selling costs or holding costs (almost certainly cash flow negative buying that time in Sydney). Once you take those into account they almost certainly would've been better off just leaving their deposit and stamp duty in a high interest savings account. Sure they haven't been crushed like if you bought in 2017 but the time, effort and risk has come to basically nothing. Not investing in Sydney property from 2015 on looks like pretty good advice right now.
     
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  18. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    With zero/negative IRs and yet no inflation in sight, we are at a point were monetary policy worldwide risks becoming totally irrelevant,
    Currency devaluation can't work against each other if every one is doing it at near same time.

    What if they carry out massive infra projects funded by fiscal expansion like never seen before? Yes... Its effectively printing money but if targeted with a future vision (as against for political scoring) it can work.
     
    Last edited: 22nd Aug, 2019
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  19. Oliver Shane

    Oliver Shane Well-Known Member

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    No worries, cheers mate... hopefully catch up with you and sash properly at a meet up soon.
     
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  20. Oliver Shane

    Oliver Shane Well-Known Member

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    It’s a race to the bottom... with negative interest rates the banks will be the biggest losers in the end.